NVIDIA falls into a downward spiral of earnings reports, with explosive performance dragging the Nasdaq down significantly

Southern Finance, 21st Century Business Herald Reporter Wu Bin reports

As Wall Street’s concerns about whether the AI boom could turn into a bubble intensify, Nvidia’s stunning earnings failed to allay investors’ worries.

In after-hours trading on February 25th Eastern Time, Nvidia’s stock initially rose 4%, then gave back gains, and ultimately closed down 5.45% on the 26th.

Before the sharp decline, Nvidia’s guidance for the first fiscal quarter easily exceeded analyst expectations, with revenue in the fourth quarter soaring 73%.

Nvidia’s explosive earnings report failed to revive AI trading, with the Nasdaq dropping over 1% on the 26th. The S&P 500 index closed down 0.54% at 6,908.86 points; the Nasdaq fell 1.18% to 22,878.38 points; the Dow Jones Industrial Average rose 0.03% to 49,499.2 points.

Why Is Nvidia Falling into a “Curse” After Earnings?

Despite Nvidia’s impressive earnings, investor sentiment turned bearish, reflecting ongoing market concerns about potential bubbles and continued pressure on this AI chip industry leader.

The post-earnings decline curse persists; this is Nvidia’s third consecutive drop after releasing generally better-than-expected results. The nearly 5.5% single-day decline in April last year, following tariff shocks, was its largest daily drop.

Nvidia CEO Jensen Huang dismissed concerns about unsustainable spending speeds, expressing confidence in the cash flow growth of large cloud service providers, stating that increasing computing power will generate revenue for these groups. “In this new AI world, compute power equals revenue.”

He also predicted that advances by leading AI model builders like Anthropic and OpenAI “are opening the floodgates for enterprise adoption of AI,” and that AI usage will continue to accelerate.

However, analysts are increasingly worried that Nvidia relies heavily on a few large data center operators known as “super-scale cloud providers,” as well as AI startups like OpenAI. Melissa Otto, head of research at Visible Alpha, said Nvidia faces “many concerns,” including how its large tech clients and startups will fund the hundreds of billions of dollars needed for AI infrastructure.

Microsoft, Google, Amazon, and Meta are expected to spend a combined $660 billion this year, mainly on AI data centers. These tech giants now face the prospect of raising funds through bonds and stock markets amid heavy spending.

Fundstrat economist Hardika Singh noted that Nvidia almost never misses on revenue, net profit, or guidance, but the issue lies in its failure to ease investor worries about its competitive moat narrowing. As the compute landscape continues to evolve and AI waves threaten to disrupt industries from cybersecurity and food delivery to banking, Nvidia has not clearly outlined its strategic response.

Alarm Bells Ringing

Behind the optimistic earnings, investors are already concerned about some warning signs.

Michael Burry, a well-known American investor and the real-life inspiration for the movie “The Big Short,” said Nvidia has put itself in a “dangerous position” to meet expected demand for its chips. If the AI boom subsides, Nvidia could face “catastrophic” financial impacts.

Nvidia’s procurement obligations surged from about $16 billion to $95 billion within 12 months, driven by major supplier TSMC’s insistence on longer-term contracts paid in cash, as a condition for building the capacity needed to produce Nvidia’s latest chips. Nvidia was forced to place non-cancellable orders amid uncertain demand.

Burry compared this situation to Cisco during the dot-com bubble. At that time, Cisco extended procurement commitments to support expected 50% annual growth. When IT and data network spending nearly collapsed overnight, Cisco wrote down about 40% of its supply chain liabilities and inventory, leading to a stock price plunge.

Additionally, Burry warned that Nvidia’s high profit margins partly stem from strong product demand granting it pricing power. If demand weakens, profit margins could decline.

Amid growing market concerns, diversification may be a good way to spread AI risks. David Clakol, Vice President of Investment Portfolio Management at Mercer, advised investors to identify high-quality stocks like Nvidia and build a broad position. Screening for stocks with similar fundamentals and aligned investment philosophies can help reduce risk.